Avon's Hapless Board Opened Door to Coty's Bid

Coty needs another dash of powder to win over Avon shareholders with its $10 billion bid. But thanks to years of flawed stewardship by the iconic American cosmetics group’s board and management, attracting Avon’s shareholders shouldn’t be impossible for the privately-held maker of Playboy and Chupa Chups fragrances. It just needs to be more creative to seal the deal.

Avon has two basic, if big, challenges. Its business model, whereby Avon ladies hawk makeup door-to-door, has faltered despite obvious advantages in penetrating emerging markets. Compounding the problem, rather than kicking out its longtime chief executive Andrea Jung, Avon’s compliant board appointed her chairman in December. That’s not just bad governance, it has queered the pitch in recruiting Jung’s replacement.

Coty’s offer is clearly opportunistic. The group chaired by former Reckitt Benckiser boss Bart Becht had been wooing Avon behind the scenes to no avail. Its $23.25 a share offer puts Avon’s hapless directors further on their back heels. The trouble is that even with a 20 percent premium Coty’s offer comes at a 30 percent discount to the stock price less than a year ago. Even hot-money investors won’t find that a compelling prospect.

There’s a way to square the circle, however. Coty is lining up potential equity financing for the deal from Warren Buffett’s favorite banker, Byron Trott, alongside debt financing from JPMorgan. Why not restructure the deal to provide Avon shareholders with some of the upside to be created by merging the two groups under a proven management team?

Becht recently left household and personal care giant Reckitt, whose primary shareholder, the Benckiser family, is also Coty’s. While there, he restructured a humdrum business once best known for its mustard, improved margins and completed a handful of takeovers to create economies of scale. It worked. Under his leadership Reckitt’s market value soared from $7 billion to some $40 billion today.

True, engineering a reverse takeover that effectively takes Coty public and puts its management in charge wouldn’t be simple. But absent plunking down a far bigger chunk of change, it may be the only way to break the unprofitable tyranny of Avon’s board over the company’s shareholders.

Rob Cox helped establish breakingviews in 2000 in London. From 2004 he spearheaded the firm's expansion in the U.S. and edited its American edition, including the daily breakingviews column in the New York Times. Prior to joining breakingviews, Rob held senior editorial positions at Bloomberg News in London, Milan, and New York.

Agnes T. Crane is a Reuters Breakingviews columnist, based in New York, where she covers capital markets and Latin America. She joined from Dow Jones Newswires, where she was an award-winning journalist who led a team of reporters covering the credit crisis.